• Total Revenue: $35.3 million in Q3, a decrease of 17% compared to the prior year.
• Software Revenue: $31.9 million in Q3, a 10% increase compared to the same period a year ago.
• Drug Discovery Revenue: $3.4 million in Q3, significantly lower than $13.7 million in Q3 last year.
• Software Gross Margin: 73.4% in Q3, compared to 75.7% a year ago.
• Overall Gross Margin: 50% in Q3 2024, down from 56% in the same period a year ago.
• Operating Loss: $68.4 million in Q3, compared to a loss of $56 million in Q3 2023.
• Net Income: Loss of $38 million or $0.52 per share in Q3, compared to a net loss of $62 million or $0.86 per share a year ago.
• Cash and Marketable Securities: $398 million at the end of Q3, up from $382 million at the end of Q2.
• R&D Expense: $51 million in Q3, compared to $47 million in Q3 last year.
• Sales and Marketing Expenses: $10.3 million in Q3 2024, a 13.6% increase compared to Q3 last year.
• G&A Expense: $24.8 million in Q3, a 4% increase compared to Q3 2023.
• Operating Expenses: $86 million in Q3, compared to $80 million in Q3 last year.

• Warning! GuruFocus has detected 6 Warning Signs with SDGR.

Release Date: November 12, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Schrodinger Inc (NASDAQ:SDGR) announced a significant collaboration with Novartis, which includes a $150 million upfront payment and potential for up to $2.3 billion in milestone payments.
• The company reported a 10% increase in software revenue for Q3, driven by increased hosted revenue and customer transitions to hosted software licenses.
• Schrodinger Inc (NASDAQ:SDGR) added $48 million to its cash balance from the sale of Morphic to Lilly, bolstering its financial position.
• The company is advancing its proprietary pipeline with three clinical stage programs, with initial data expected in 2025.
• Schrodinger Inc (NASDAQ:SDGR) has raised the lower end of its software revenue growth guidance for the year, indicating confidence in future performance.

Negative Points

• Software revenue for Q3 was slightly below expectations, partly due to slower recognition of revenue from the Gates Foundation grant.
• Drug discovery revenue was significantly lower in Q3 compared to the previous year, leading to a reduction in full-year guidance for this segment.
• The company's overall gross margin decreased to 50% in Q3, down from 56% a year ago, impacted by lower drug discovery revenue and software gross margin.
• Operating expenses increased, driven by higher R&D costs, contributing to an operating loss of $68.4 million for the quarter.
• Schrodinger Inc (NASDAQ:SDGR) reported a net loss of $38 million for Q3, although this was an improvement from the previous year's loss.

Q & A Highlights

Q: Can you expand on the key drivers that give you confidence in the updated software guidance, and how does the Novartis deal contribute to this? A: Geoff Porges, CFO, explained that the fourth quarter typically accounts for a large portion of annual revenue, around 42% to 44%. The Novartis deal is a significant component but not the only one. Discussions with multiple companies about renewals are ongoing, and the confidence in the guidance range is based on these discussions and the progress made so far in the quarter.

Q: Should the narrowed drug discovery guidance be seen as a timing issue, and can we expect a stronger performance in early 2025? A: Geoff Porges noted that the reduction in guidance reflects timing uncertainties around year-end events. Confidence for next year is high, with expectations that opportunities anticipated for the end of this year may materialize in 2025, bolstered by the Novartis collaboration.

Q: What percentage of your software business is now cloud-based versus on-premises? A: Geoff Porges stated that 28% of the software business was hosted in Q3, up from 23% last year. The percentage is higher when focusing solely on customer contracts, likely in the high 30% range. The trend towards hosted solutions is expected to continue over the next few years.

Q: With initial MALT1 data expected soon, what are your expectations for this data release, and how are you defining success? A: Karen Akinsanya, President of R&D Therapeutics, mentioned that the focus is on safety, PK, PD, and early efficacy evidence. The study is a dose escalation one, not powered for full efficacy analysis, but they are looking for positive drug properties and activity evidence in relapsed refractory B-cell malignancy patients.

Q: How are you managing P&L with advanced clinical programs, and what are the go/no-go criteria for advancing clinical programs beyond Phase 1? A: Geoff Porges emphasized focusing on reducing expense growth and achieving operating leverage. Investment continues in the platform and proprietary molecules, but not all molecules will be advanced independently. Karen Akinsanya added that monotherapy activity is crucial for MALT1, CDC7, and Wee1, with clear evidence of activity being the bar for advancement.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.